Washington County Commissioners approve excise tax changes

June 18, 2008|By JOSHUA BOWMAN

WASHINGTON COUNTY -- After more than a year of debates, studies and recommendations, the Washington County Commissioners on Tuesday unanimously approved a new excise tax ordinance that will change both how and to what extent the tax is levied on new construction in the county.

Those in favor of the changes say the tax will be more equitable and will eliminate some of the loopholes builders have used to avoid paying the tax while maintaining enough tax revenue to pay for new schools, roads and other improvements needed to accommodate new development.

"This issue has not been taken lightly by the commissioners," President John F. Barr said. "Not all of us agreed, but we did a good job, as gentlemen, trying to come to a consensus and were able to put this thing to bed."

With the changes, which take effect July 1, the county's excise tax on residential construction will no longer be a flat rate; instead, it will be based on the square footage of new homes. All residential construction will be charged $3 per square foot.

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Nonresidential excise tax also will be based on square footage but the categories for nonresidential construction will be simplified, from five to two.

Nonresidential retail construction will be charged $3 per square foot, and nonresidential nonretail construction will pay $1 per square foot.

In addition, exemptions for elderly housing, workforce housing and the first 50,000 square feet of nonresidential additions have been removed. Language allowing the county commissioners to provide for additional exemptions or waive the tax on some nonresidential building types also was eliminated.

The commissioners voted Tuesday to approve the changes after a brief public hearing in which only three people spoke.

Jeremy Holder, project manager for Westfields housing development on Sharpsburg Pike, urged the commissioners to remove a stipulation in the ordinance that doubles the tax when a developer has built more than 25 units in a subdivision in one fiscal year.

"It is unequivocally and patently unjust to burden a taxpayer with a tax that is double what his neighbor paid," said Holder, who noted that because the housing market is down the commissioners can "rest assured" that the higher tax will be passed on to home buyers.

Commissioner William J. Wivell said the provision is needed because larger developments have a greater impact on the community.

"As much as I am opposed to taxing people to death, I do think this is a fair feature," Wivell said.

Although the commissioners voted 5-0 to approve the changes, they were divided last October when deciding which rates to recommend to the Maryland General Assembly, which made the final changes to the ordinance.

Excise tax revenue has fallen dramatically with the decline in the housing market.

In fiscal 2007, the county collected $3.8 million in residential excise tax -- about $11.5 million below budget projections.

A report prepared in October 2007 by the Washington County Budget and Finance Department showed that residential rates would have to be set between $3 and $4 per square foot to meet budget estimates by 2013.

Commissioner James F. Kercheval argued then for a higher residential rate, saying he did not think $3 would be "revenue-neutral."

During the same meeting, Barr said he favored a rate of $2 per square foot, which was recommended by a committee created last year to suggest changes to the excise tax ordinance.

On Tuesday, Kercheval acknowledged that he did not agree with the rates that would be adopted but made the motion to approve the changes anyway.

"While I favor different rates, we had this argument six months ago and there's no point in having it again," Kercheval said.

Under the revised ordinance, the commissioners have the power to change the tax rates without permission from the Maryland General Assembly, which normally has to approve tax changes.

The legislature approved excise tax caps that will let the commissioners raise or lower the rates without state approval.

The caps are $4.50 for residential, $4 for nonresidential retail and $1.50 for nonresidential nonretail.

Planning Director Michael C. Thompson said the county has fewer than 15 permits applications pending that would be subject to excise tax.

Those applicants might have their choice as to which tax they pay.

Kercheval said by phone Tuesday night that because the difference in most cases is not large, the commissioners did not stipulate how those permits should be handled.

When the tax was changed in 2005 to a flat rate, the county received more than 400 permit applications in June of that year from builders who would have paid more under the new rate.

Thompson said he does not expect the same rush this year.

"You've got some who will pay more and some who will pay less, and in both cases it's not a lot of money," Thompson said.

What is excise tax?

Excise tax is levied on new construction, both residential and nonresidential, and is meant to offset the impacts of development, similar to impact fees in other areas.

The excise tax ordinance limits how the county can spend excise tax revenues.

Revenues from nonresidential construction can be spent on education and public safety capital expenses, public infrastructure projects and capital-improvement related debt.

Residential excise tax revenues must be spent as follows: 70 percent for schools, 23 percent for roads, 2 percent for public libraries and 5 percent for parks and recreational facilities, public safety, water and sewer infrastructure and agricultural land preservation.

The tax must be paid before the county will issue a building permit.

Builders or developers that apply for building permits are charged the tax, but subdivision developers generally pass the costs of the tax along to homebuyers.